Learn more about how equity income funds work and how they might fit into your investment strategy - even if you’re looking for growth instead of income.
Investing in equity income funds
What are equity income funds?
As the name suggests, income funds aim to provide investors with regular payouts of cash.
Many income funds invest in bonds, since the companies or governments that issue bonds promise to make regular interest payments. Equity income funds invest in shares instead of bonds, so these funds generate income from dividend payments rather than interest.
The range of companies that pay out dividends is diverse, so these funds can vary greatly in terms of the industries and regions they invest in. But they do tend to invest primarily in large or medium-sized companies that are well-established in their industry, since these are the kinds of companies that pay out dividends.
What to look for when choosing an equity income fund
Not every company pays out dividends and those that do tend to offer payouts only when profits are strong. So an equity income fund’s success depends on the fund manager identifying companies that are likely to pay out regular dividends for the mid- or long-term.
Some fund managers tend to focus heavily on a company’s past dividend yields when choosing investments. But this strategy puts the fund at a disadvantage when market conditions change. A fund that focuses on identifying companies that can potentially deliver repeatable returns is more likely to deliver more stable income over the long run.
As an investor, you’ll need to read the fund’s Key Investor Information document to understand the fund’s objectives, where it invests and the risks associated with it. When comparing funds’ past performance, you may want to look at results over multiple years and varied market conditions, if available. But do note that past returns do not guarantee future performance.
Using equity income funds to grow your nest egg
While it may seem counterintuitive, equity income funds can become solid sources of capital growth. By choosing accumulation units in your fund, you can make sure any income will be automatically reinvested.
Using income funds for growth may be an appealing strategy for more cautious investors, since equity income funds are often less risky than typical growth funds. This is because income funds tend to invest in larger, more established companies.
Using equity income funds in your portfolio
Retirees looking to supplement a pension are the traditional investors in both bond income funds and equity income funds. But since equity income funds tend to balance both income and a modest potential for growth, this broadens their potential appeal to a number of different kinds of investors. Along with the potential for growth comes the potential for loss. Investors looking for a more conservative approach may want to consider bond funds as a more stable, though not risk-free, alternative.
If dividend-based funds don’t seem like the right fit for your investment goals, keep in mind that there are many other fund options to choose from. In fact, most investment funds offer the option of income-earning shares, so with a bit of research, you can find a fund that offers income shares covering the exact region or industry you’re looking to invest in.
- Past performance is not a guide to future performance.
- The value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.
- If interest rates rise, the value of investments in bonds may fall.